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Here We Go Again - Estate Tax Exemption May Be Reduced Come Next Year

On September 15, 2021, the Ways and Means Committee approved the tax provisions to be included in the the legislation known as the Build Back Better Act, which is designed to fund President Biden’s social and educational reforms.

It is the early evening of September 30 as I write this, and as of now the bill has not been voted on despite Nancy Pelosi's insistence that the bill would move ahead with a vote today.

The bill provides a view into the current proposals to balance revenue and spending priorities. Not surprisingly, it includes an accelerated reduction in the Federal Estate Tax Exemption (Unified Credit) from its current level of $11.7 Million level down to $5 Million adjusted for inflation (so roughly $6 Million). The exemption is scheduled under current law to be reduced to that level in 2026; however, the proposed new legislation would lower the exemption effective January 1, 2022.

Among other changes, the bill also seeks to change the grantor trusts rules to provide that such trusts would no longer be excluded from estate tax if the decedent is the deemed the owner of the trust for income tax purposes. The proposed law also provides that sales between an individual and their grantor trust would be taxable even if they are the deemed owner of the trust. These laws would apply to grantor trusts created on or after the January 1, 2022, and would also apply to any contribution after that date to an existing irrevocable trust. Also of significance is the elimination of valuation discounts for estate and gift tax purposes on transfers of entities (such as Family Partnerships) holding nonbusiness assets for transfers made after January 1, 2022.

As was the case in late 2020 around election time, some wealthier individuals and families who can afford to part with assets are making large gifts now and taking advantage of the current $11.7 Million gift tax exemption in an attempt to get ahead of the potential changes in the law. Although there is still time to do that (because any change to the exemption amounts would not be effective until January 1, 2022), anyone seeking to make gifts ahead of the new law needs to act quickly because, as discussed in a recent Forbes article, it will soon become increasingly difficult to find the professionals available to do the work in time.

Some of President Biden's earlier proposals, such as the realization of capital gains at death or when assets are gifted, were not included in these recent provisions. That said, it is possible for those for such proposals to weave their way in at a later date in the legislative process.



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